Bitcoin can be a little bit difficult for people to get their heads around and her article contains some misunderstandings, but they’ve been fairly thoroughly addressed in the comments, so rather than go through the thing point by point, I’m going to go ahead and put the alternative case.

Here’s why the open metaverse needs Bitcoin, or something similar.

1) Users should be able to move their money easily from grid to grid.

When Linden Lab created Second Life, they built in a very nice, simple micro-payments system that allows you easily buy and sell content created by other users. You have to pay money into their system with a credit card, but you only have to do it once, and the same money will work wherever you go in Second Life. But their system depends on having a single company running everybody’s virtual spaces. The OpenSim vision is of independently-run grids connected together, so that you can easily jump from one grid to another. But when you do that, you don’t want to have to keep paying money into every grid you visit. We need one common balance that works everywhere. Meanwhile,

2) You don’t want to be baby-sitting too much of other people’s money.

Linden Lab are a big company with rich investors and their own lawyer, but in the Open Metaverse we want anybody to be able to run a grid, just like anybody can run a web server. If you maintain your own metaverse currency, you have to take on a lot of responsibilty that you may not want, and your users have to give you a lot of trust thay they may not want to give. You also open yourself up the risk that you’re somehow in breach of one of the many amazing regulations that surround currencies and payment processing.

It would be much better to leave your users in control of their own money and wash your hands of the whole thing. The only thing you want to be doing is prompting people to make payments and checking that they’ve been made. You don’t want to set yourself up as a participant in transactions between your users, and you certainly don’t want to look after people’s money for them.

3) When you have a single point of failure, it always fails.

If you’ve been reading this so far, you may be thinking, “No problem, I’ll use Open Metaverse Currency“. OMC is a virtual currency provided by a great little company called VirWox. You can install their money module on your server, and your users will be able to buy their virtual currency and spend it on any other participating grid.

But now, having gone to all the trouble to build OpenSim and avoid being dependent on Linden Lab, we’ve made ourselves dependent on VirWox instead. If they go bust, get bought out, take on a clueless manager, make a more interesting product and decide to focus on that, get shut down by the regulators or do any of the things that usually happen to technology start-ups, it’s goodbye to all your Open Metaverse Currency. Not only that, OMC effectively have a license to print money for themselves and devalue everybody else’s. VirWox seem like very ethical people, but to avoid the temptation to make up for a poor quarter by quietly debasing the coinage, they’ll have to be.

4) Online micro-transactions need cash, not credit cards.

Maria makes a big deal of how Bitcoin isn’t backed by a company, so there’s nobody checking for fraud and looking after you if you’re a victim of it. This is of course true. But in reality I don’t know how much luck you’d have getting your OMC or your Linden Dollars refunded if somebody stole your laptop. And a lot of the fraud that credit companies deal with is actually dealing with the gaping holes in their own security. For example, credit card security is based on the idea that your money is protected by a secret number that you tell everybody that you do business with. This turned out not to work very well, so then they came up with a special three-digit code and you had to tell everybody you did business with that as well. The only way to persuade buyers to adopt a system that’s so full of holes was to let them cancel payments after they’ve been made. But instead of making up the difference themselves, they charge the cancelled payment to the unlucky merchant who was supposed to be getting it. And that, dear grid operator, is you.

It isn’t like this in the real world. We’ve been doing small transactions in meatspace for millenia, and payment systems have never been bundled together with buyer protection systems. Last week I bought a cup of coffee from MacDonalds for 100 yen and got it home only to discover if was full of coffee grounds. I took it back to the shop and they gave me a new cup. A less generous vendor might have refused. But in neither case would I have been able to take my dispute to the Bank of Japan, who issued my 100 yen coin. Small transactions work best when they are final and non-reversible. That doesn’t mean that there is no accountability; if I hadn’t been happy I could have called the national MacDonalds customer support number, or taken it up with the consumer protection bureau. But the accountability mechanism is separate from the payment system. Trying to mush them together for small transactions turns out to be expensive, unfair and unpredictable. When you get paid, you need to stay paid.

5) Volatility doesn’t matter much.

There’s one serious point in Maria’s piece, which is that although it’s been quite stable recently, Bitcoin is prone to volatility that other currencies aren’t usually subject to. Real-world currencies in developed countries tend not to vary against each other by more than a factor of two, and vendor-backed currencies like the Linden Dollar and OMC are kept close to a real-world currency by controlling how much money is issued. Bitcoin has been all over the place, and may see more crazy price spikes if it’s subject to another wave of hype.

But as a grid operator, or indeed a user, this is probably not actually a big problem in practice. You don’t keep all your money in a metaverse micro-economy, so a change in value just means a bit of variation in the value of the small amount of money you’d hold for transactions, which could go up just as easily as it goes down. If you find adjusting prices tiresome and want to peg them to the Dollar or the Yen that’s not a huge technical hurdle – we can probably build it into the money server.

Make me decentralized, but not yet.

Having said all that, there is a real reason why grid operators shouldn’t use Bitcoin yet, which is that so far there is absolutely no technical infrastructure to do it. At a minimum, we need a version of the money server designed to handle Bitcoin addresses, broker transactions and deliver inventory when they are complete. (I’m working on this, but most of my spare time goes into SLOODLE and Avatar Classroom.) And to make the process both really smooth for the end user and fully decentralized, we’ll also need integration with the viewer.

There’s some technical work to do here and I’m not confident that the metaverse will end up adopting Bitcoin. But it should.

10 Responses to “5 reasons grids should use Bitcoin (if I ever get around to finishing the money server)”

* Volatility could be a big problem for grids if they collect rent in Bitcoin but pay for their server space in US$ and Euros — they’d have to keep changing their rates. And any merchant who makes a real world living from in-world sales would similarly have to keep adjusting their rates.

* How will your users get Bitcoin? If they buy it from you with a credit card, and it turns out the credit card was stolen, you’ll be liable for the entire amount. But if you don’t allow people to buy Bitcoin from you, they won’t be able to play unless they can find other places to buy Bitcoin. The list of exchange that sell Bitcoin are limited and, frankly, none of them have any kind of name recognition (https://en.bitcoin.it/wiki/Trade), except for Virwox itself. Most also require wire transfers or other types of payment methods that the average user isn’t going to understand. For online purchases, you want to be able to make payments with PayPal or with credit cards.

and, finally:

* What makes you think that Bitcoin will be around longer than OMC? (I’m asking this seriously, not snidely. There are no switching costs for companies that decide to stop accepting Bitcoin, whereas if you, say, stop accepting US dollars you will be cutting yourself off from a very large customer base that uses only that currency. There is no large customer base that exclusively uses Bitcoin.)

In general merchants who are worried about exchange rate risk can use Bit-Pay or Paysius to process the transaction for them, automatically convert received bitcoins to USD and deposit them in a bank account.

As far as users obtaining bitcoins BitInstant just had launched a service that lets people deposit cash at major banks and other institutions and get bitcoins within minutes.

The difficulties you bring up were problems at one time but have since been solved. Developments are coming very quickly now in the Bitcoin space – if you don’t keep up with them your knowledge of what’s possible will rapidly become obsolete.

That’s what I meant about pricing in dollars and auto-converting, if that’s what the grid owner wanted. We could have the money server handle this, so the price displayed above an object would display in USD, but when you went to buy it the server would look up the current exchange rate and prompt you for a payment in Bitcoins. Or we might set prices in Dollars but display them in Bitcoins and update the display once every 24 hours or so.

(Right now Bitcoins seem to be stable enough that I think I’d go right ahead and price everything in Bitcoins, but we need a fall-back plan in case that changes.)

It would still potentially be a nuisance though, because the user’s balance would vary from day to day. That’s OK if we’re just dealing with small fluctuations, but it’s annoying to have $5 in your balance one day and $30 the next. Hang on, no it’s not, that would be great. It’s annoying to have $30 in your balance one day and $5 the next.

Like I say, it’s not a devastatingly bad problem and I think the other benefits make it worth putting up with it, but it’s a definite disadvantage compared to a system like OMC or L$ that tends to be fairly stable (at least until the company running it disappears) or a system that uses your regular currency directly.

PS. Sorry for the delay in your message showing up – you got spam-filtered.

Thanks for the response, Maria. Taking them one at a time – this will be a bit long..:

– Volatility: Yes, if Bitcoin kept moving around wildly (although it hasn’t been lately) you’d have to keep changing your rates, although you probably hedge against it if you wanted to. This is annoying, but if you wanted to peg your prices to the dollar or whatever currency your expenses were in you could – a lot of merchants who accept Bitcoin price in their local currencies and have systems that adjust their prices automatically. Similar things happen already when I spend Yen on something priced in Dollars – in the credit card case I don’t even know how much it’s going to cost me until I get my bill.

– Who would people buy them from?

Whoever is most convenient at that time and in their jurisdiction. Right now I’d use either VirWox (where you can use a credit card or sell existing Lindens) or Mt Gox (the latter are in Japan – I think I could do a bank transfer, which is easier and safer here than a credit card), but payment processors will come and go. If you’re entrusting your money with somebody (as you do with OMC) it matters if they go bust, but if you’re just making a transaction, it doesn’t matter as long as they don’t go bust in the middle of handling your transaction. That means you don’t need anybody as trustworthy as a bank. I suppose you could set yourself up as a broker if you wanted, but I wouldn’t recommend it to most people. You’re a grid operator, not a bureau de change. Use Bitcoins on your grid, send your users off to somebody else to buy them and stay the hell out of the byzantine regulatory minefield that is the money changing business.

Having said that, although I’m advocating Bitcoin as an across-grid micro-currency, that doesn’t mean I think everybody should refuse to have any dealings in regular currencies. Obviously you want to make things as convenient as you can for your users. For example, Linden Lab issue Linden Dollars in exchange for premium membership, which you pay in US Dollars. They (and OMC) then have the same problem you’re raising here, where you’re giving somebody a currency they can trade out of right now, on the basis of an unspoken promise that they really own the card whose number they’re providing, and they’re not going to call their credit card company and cancel. (It might sound less bad for Linden/VirWox because they’re printing the money they give people rather than buying it, but money they print for somebody in return for a payment they don’t get is money they could instead have printed for somebody in return for a payment they do get, so it has the same effect on the bottom line.) Anyhow one thing Linden do here is to take a big up-front fee in the form of premium membership, but then give you your Linden Dollars in installments (the “stipend”), and only on condition that you keep logging in. That way if they get a charge-back a month after you paid them they can stop your stipend and they won’t have lost much.

It’s OK if some grids choose to get involved in difficult, risky things like interfacing with credit card companies. What we don’t want to do is be stuck with a metaverse-wide standard where everybody has to.

– Why is Bitcoin less likely to vanish than VirWox?

There’s a bit of push-back on your thoughts on this in the comments to your article, and I think the Ron-Paul-loving hoards have got this right and you’ve got it wrong.

First, I think you get the fragility of VirWox’s situation – for example in your earlier comment you said that you weren’t sure they could survive if Second Life went down, which I’d see as one of the main things the open metaverse is supposed to protect us from in the first place. I have no idea what their financial situation is – do you? Likewise, what’s their regulatory status? Does anybody even know what licenses you’d need to do what they’re doing? Not to mention all the normal risks surrounding tech companies – crap management, buyouts, pivoting to a different product, technical cock-ups, failed backups, or just plain old-fashioned running out of money. The various Bitcoin currency brokers and online wallet services have all these problems and more, but the difference is that the Bitcoin network doesn’t depend on them; It can survive the disappearance of any given company, or even a bunch of companies disappearing simultaneously.

Where we disagree is that you seem to think that it would be easy for somebody to bootstrap a new currency and have everybody switch to that, and I think that would be very hard. Once something becomes a de-facto standard it’s notoriously hard to shift, which is why I’m still typing this on QWERTY keyboard. That’s particularly true when you’re dealing with something with very strong network effects, which BitCoin has in two ways – firstly because people are used to accepting it, and secondly because it has an established network of payment processors (“miners”) who protect the integrity of the network. Bitcoin succeeded because there was nothing else like it, but it’s very hard to get traction with a new currency that nobody accepts and nobody will process, even if you’re Justin Bieber.

Also note that even if people did switch away from Bitcoin, since it has no single point of failure, it would fade away rather than vanish overnight. That would give grids the chance to switch over to the new thing and let their users trade out (at a loss, presumably), which is bad, but not as bad as waking up one morning and saying, “Oops, no more OMC. Sorry guys, your money’s gone. We don’t even know how much you had any more.”

Sounds like grids should seriously consider something like PayPal Micropayments instead — the company’s been around a long time and has all the necessary licenses, it can work across all grids, PayPal accepts all major credit cards and other payment options, no worries about fluctuations.

The transaction costs are a bit higher than with any other system (except for standard PayPal payments), but you’re paying for all the licenses

Paypal micro-transactions are probably worth looking at short-term, especially for user->grid transactions. But long-term, as a micro-currency for the metaverse:
* 5 cents minimum per transaction is still far too expensive – that’s nearly 10 Lindens!
* It seems to be designed for user->merchant transactions, but what we need is user->user, while the grid operator verifies. (You can do this with Bitcoin because it does transactions in public.)
* I’m not sure how you’d integrate this to make it a seamless user experience. I guess you’d send users to a web page, which also be the stopgap solution with Bitcoin integration if I ever get around to it, but to make it really smooth we need to build it into the client, which their API may not be up to (because it’s designed for merchant-user, not user-user.)
* You’re still depending on one company. In this case one that won’t go out of business and may even be Too Big To Fail, but they’re notorious for suddenly cutting people off and/or freezing their funds.
* I’m not sure, but I suspect they still reverse transactions, whereas we need transactions to be final, for reasons I gave in my post.

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